Universal Easing Back On CD Price Cuts
By Richard TafoyaJun 21, 2004 04:23 PM
Universal Music Group’s CD price-cut plan, hailed as a hope to get music buyers back into stores, has hit resistance from retailers, all but killing the effort.
Nine months ago, Universal Music executives announced with great fanfare that the company was preparing to slash prices on CDs. The strategy was expected to breathe new life into the flagging offline retail sector, which has been hit hard by a combination of illegal online music trading, audience migration to online stores and a long-running sag in pop sales on the heels of the Jive Records-powered teen music boom of the late 90’s.
Today, Universal’s grand plan has been quieted by a combination of resistance from the very retailers the price cuts were expected to help and internal reconsideration of the program’s details.
The Wall Street Journal reported Monday (6/21) that while some wholesale prices--the price paid by retailers--did decrease through the first quarter of 2004, retailers reportedly including Virgin Entertainment Group Inc.’s Virgin Megastores to Trans World Entertainment Corp.’s FYE either ignored the program or were very slow to implement it, keeping the savings from being passed on to consumers and essentially pocketing the difference.
Part of the retailers’ resistance stems from the dynamics of the industry, where so-called big box retailers like Best Buy and Costco regularly slash prices to bring traffic into their stores, happily giving away the profit on CDs to sell larger profit margin items like CD-R accessories or headphones. The tactic squeezes smaller CD stores, who depend almost entirely on their CD profit margins to stay in business.
The Universal program would have, in effect, reduced both Universal’s and the CD retailers’ slices of the price pie, putting the small store in a position where they have to sell more CD’s with a smaller markup on a smaller wholesale price to maintain their status quo with current pricing. On the other hand, the new prices would allow big box stores to slash their prices even further, magnifying the pressure on the smaller stores.
Universal also admits some missteps in announcing the program, with many merchants alerted at the last moment while the company played up the program in press announcements. The result, according to retailers that spoke with the Journal, was a feeling that they were being forced to go along or face a public backlash.
In the aftermath, Universal has begun inching wholesale prices on most titles back up, though still below pre-program levels. Industry analysts attribute the partial retreat to a combination of retailer resistance and no follow-through in the industry with competing labels following suit.
Jim Urie, president of Universal Music & Video Distribution, told the Journal, “I wish there were more people on the bandwagon. Where we made a decision to take action, they have decided to dip their toe in the water.”
Universal’s splash may yet prove to have some industry momentum. Last month, Warner Bros Records initated price cuts on about 1,700 catalog titles to a suggested price of $9.98.